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Bitcoins are on the minds of lawmakers

Dread Pirate Roberts, the owner of the world's most popular online drug market Silk Road, told FORBES, "We’ve won the State’s War on Drugs because of Bitcoin." It's a provocative statement, and it's part of the reason the digital currency -- which has traditionally allowed people to buy things online without having it tied to their offline identities -- is starting to get more attention from "the State."

Bitcoin's major businesses and investors got subpoenas last week from New York's financial regulator who wants to make sure they are all on the up-and-up. Meanwhile the Senate Committee on Homeland Security sent a letter to DHS Secretary Janet Napolitano asking what the agency is doing to crack down on the illicit use of Bitcoins. According to the Washington Post, similar letters were sent to a host of other three-letter agencies including the DOJ and the SEC. Cryptonerds are no longer the only people who care about the online currency.

"The speed at which payments can be sent globally and the potentially profitable investments that can be made trading virtual currency have made them attractive to entrepreneurs and investors alike," write Senators Thomas Carper (D-Del.) and Tom Coburn (R-OK) in the letter. "However, their near anonymous and decentralized nature has also attracted criminals who value few things more than being allowed to operate in the shadows."

(We actually depicted Silk Road owner Dread Pirate Roberts as a shadow in our profile of him this issue as he keeps his real identity tightly under wraps. The only currency his site supports is Bitcoin.)

The Senate Homeland Security Committee posted the letter online [PDF]. Noting that "virtual currencies appear to be an important emerging area," the Committee has started interviewing people "inside and outside of government" about it. Talking ominously of the need to "make sure that potential threats and risks are dealt with swiftly," the Committee asks Napolitano (who won't be around much longer) to reveal the DHS plan for the treatment and regulation of virtual currency and how it's coordinating with other agencies.

The Senatorial Toms aren't just worried about people using Bitcoin to buy drugs and other contraband online. The letter mentions the IRS's concerns about taxing Bitcoin. Fanning those flames, a University of Florida professor, Omri Marian, warned this month that cryptocurrencies may be the "super tax havens" of the future.

"Bitcoin (and other cryptocurrencies) offer one major advantage to tax-evaders that traditional tax havens do not: the operation of Bitcoins is not dependent on the existence of financial intermediaries such as banks," Marian writes in an academic paper that Politico covered. "In the Bitcoin cyberspace, the new agents of tax collection -- the financial institutions -- are taken out of the picture."

Some Bitcoin regulation has already started happening. After guidance from the Department of Treasury's FinCEN earlier this year, many Bitcoin businesses changed their practices to come into compliance with U.S. law. Japan-based Bitcoin exchange behemoth Mt. Gox, for example, now requires its account holders to provide identification -- cutting back on the anonymity that makes the currency appealing for illicit use (such as on Silk Road).

The letter from the Senate asks for information to be provided by DHS by the end of the month. I suspect that Bitcoin is going to be in the limelight at a Senate hearing or two this fall.